Oil's Recent Slide: Instability, Oversupply—and Iran?

Jen Alic|Oilprice.com

Published 5:52 PM ET Thu, 20 Sept 2012
Oilprice

The Saudis have moved to pump more oil, the US sits on increased crude supplies, the market has gotten edgy over Eurozone economic instability, and FedEx cut it profit outlook — all of which drove the price of oil lower for three straight days to its lowest level in over a month.

Meanwhile, an overlooked talk with Iran has added to oil speculation. More on that in a minute.

On Tuesday, oil futures closed at $95.29 a barrel in New York, down $1.33 from Monday, which had seen a sudden $3 per barrel drop in 60 seconds. On Wednesday, oil prices further slid in New York, to $92.26 a barrel for October light sweet crude deliveries. The commodity rallied back above $110 on Thursday.

Many recent factors have driven the speculation leading to the recent drop in oil prices, but to varying degrees. The FedEx news had only a short-lived effect on the oil prices, for instance, as did the European Central Bank’s announcement that it would implement more monetary easing measures, while announcements coming out of Saudi Arabia that the country intends to keep production high in order to suppress prices has a more lingering effect on the market.

At the heart of oil price drops on Tuesday was the Eurozone crisis, and particularly Spain’s debt woes. Prices plunged despite the fact that Spain sold off nearly $6 billion in short-term debt because its 10-year government bonds remained at an economically untenable level, with around 6 percent yield. At the same time, the euro dropped against the dollar, which typically leads to lower oil prices simply because oil is priced in dollars.

Another factor pushing oil prices down on Tuesday was the announcement by FedEx that it would cut its forecasts for growth in 2013 on slimming profits.

By Wednesday, Tuesday’s factors were no longer key drivers, giving way instead to speculation based on a combination of Saudi Arabia’s ready pump hand and reports that US inventories are swelling.

Crude oil futures were down sharply at mid-day Wednesday on the New York Mercantile Exchange, on the heels of a report showing a big jump in U.S. inventories. On Wednesday morning, the US Energy Information Administration announced that crude inventories had increased by more than 8.5 million barrels last week. This increase went far beyond what analysts had earlier predicted.

Meanwhile, inventories look set to maintain supply as Saudi Arabia continues to produce more crude than it has in 30 years, with supplies predicted to exceed global demand by over 1.6 million barrels per day from OPEC countries.

There are countless other factors driving oil price fluctuations, attempting to predict the future of oil prices is a harrowing ordeal, and analysts get it wrong more often than not. Predictions are dependent on all the variables that drive speculators and their perceptions.

The perceived implications of rising Chinese-Japanese tensions over the disputed (oil-rich) Shenkaku islands, a wave of Arab-Spring like protests across the Middle East/North Africa, only this time with a decidedly anti-American flavor, a shaky stand-off with Iran and an Israeli elite that is becoming increasingly difficult to hold back—all of these things will drive oil prices on some level by influencing the perception of speculators. And they are very easily influenced.

All of that brings us back to the reasons behind Monday’s sudden $3 drop in crude oil prices, which is the most mysterious day of trading of the week. Someone dumped 23,000 crude and Brent contracts from CME’s West Texas Intermediate and Intercontinental Exchange (ICE) on the market very suddenly. No one seems to know who it was, but certainly Saudi Arabia was already at the pump, prepared in advance to announce an increase in output.

Iran Talks in Istanbul

Less than 24 hours later, a very interesting meeting took place in the Iranian consulate in Istanbul between Iran’s foreign minister and Catherine Ashton, who is heading the 5+1 group talks over Iran’s nuclear program. In all likelihood, some deal has been cut with Iran, and it is to Iran that we should probably look for indications of future oil prices. If a deal is cut with Iran over its nuclear program, oil prices will plummet.

The big question here is why the Saudis are promising to maintain high levels of production at a time when supplies are already swelling? There are more than natural market forces at work here, and speculation is being manipulated.

Will oil prices go back to their declines? For this, follow the geopolitics — particularly where it concerns Iran — though that can be difficult when deals are cut in corridors that are closed to the public.